Proprietary funds off Canadian regulators’ radar

The ongoing Canadian regulatory changes intended to protect clients’ interests seem to ignore the conflict of interests posed by proprietary funds of large financial institutions sold by representatives who are employed by these same organizations.

Distributed mainly by banks, these funds are subject to sales quotas for representatives, who also work for the promoters, Invesco Canada CEO Peter Intraligi points out.

“It’s a key difference unique to our country: 65 cents in one dollar go into proprietary products. You don’t have it in the USA,” Intraligi says, citing data from an Investor Economics report.

Jason MacKay, senior vice president, national sales manager at Invesco, attributes this bias in favour of proprietary funds to Canadian culture. “We trust our banks. They are trusted by the public and the regulators. Americans don’t share that culture trait.”

He thinks that eliminating commissions will spark a stampede toward proprietary funds. This will further reduce investors’ choices.

Intraligi agrees, saying that the search for level ground is incompatible with such a culture. “We’re fiercely independent and we believe that advice should be independent. Would I be allowed to sell a drug manufactured by my own company? If you are to create a regulatory infrastructure that is level for all, it must fix all the problems,” he says.

Invesco adds that leveling rather than eliminating commissions would resolve conflicts of interest much more effectively. “[The Regulators] have an issue that the advisor being paid when he sells a product creates a potential conflict of interest. We don’t share that view. If you have one level of compensation, let’s say 1%, for all funds, you eliminate that conflict of interest,” Intraligi says.

Proprietary funds have powered banks’ growth from modest players in terms of mutual fund assets under management in the early 2000s to a dominant position today, McKay adds. The trend will accentuate with the rush to exchange-traded funds (ETF) and to robo-advisors. “Especially when you combine these two trends with the regulatory environment that allows us to do that and continue to do that (selling proprietary products) as [the regulators] look for greater transparency.”